Weekly house view | Delayed again

Those who believe that the US economy will achieve a ‘soft landing’ received a boost last week. According to preliminary figures, GDP grew at a better-than-expected annual rate of 2.8% in Q2, while the rise in the core personal consumption expenditures (PCE) slowed to an annual 3% in June from 3.8% in May. We still believe aggressive policy tightening over the past 15 months has yet to be felt in full. But with consumer confidence rising in June, business investment climbing and weekly jobless claims falling, the downturn we continue to expect may be further delayed. The economic news out of Europe was more mixed. Although GDP rebounded slightly in Q2, purchasing manager indexes (PMI) showed business activity in the euro area weakened in July, with manufacturing activity contracting for some time already. Overall, we believe the euro area economy could stagnate for the rest of the year and eke out real GDP growth of 0.5% in 2023 as a whole. Our full-year forecast for the US is 1.4%, but with upside potential. Official Chinese PMIs for July also dropped, focusing even more attention on the economic stimulus package flagged by the communist party last week. Key to watch will be measures to boost consumption, to address the huge local-government debt problem and to help the property market, whose recovery has stalled.

The US Federal Reserve (Fed) and European Central Bank (ECB) each raised rates by 25 bps last week and left the door open for further rate rises. Currency markets thought the case for another US rate hike was more convincing, with the USD gaining on the euro over the week. Evidence from bank lending surveys that monetary tightening is transmitting faster to the real economy in the euro area than the US would seem to confirm this view.  But perhaps the most interesting move came from the Bank of Japan, which basically loosened its grip on Japanese government bond (JGB) yields by allowing them to rise up to 1.0%. While the market has yet to fully test the new 1% ceiling, this is an area to watch. The Bank of Japan still has an ultra-accommodative monetary policy, with the overnight rate still at -0.1%. But volatility in bonds, currencies and equities could increase if the BoJ moves closer to some sort of policy ‘normalisation’.

Q3 results continue to come in generally better than expected—although earnings misses are being punished more than earnings beats are being rewarded. Likewise, the biggest one-day gainers often fail to hold unto those gains, showing the market mood remains febrile. This week will be another busy one in the US, marked by the last big wave of quarterly results as well as the nonfarm payroll and inflation reports for July.